White House unveils opening bid for ‘biggest tax cut’

The White House made its opening bid for what officials called the “biggest tax cut” in U.S. history — with cuts that would benefit businesses, the middle class and certain high-earning individuals — but left unanswered questions about whether the plan would be paid for, or how.

A list of goals for the tax overhaul, unveiled by President Trump’s top economic adviser Gary Cohn and Treasury Secretary Steven Mnuchin Wednesday, calls for slashing the federal income tax rate to 15% for corporations, small businesses and partnerships of all sizes. It also imposes a one-time tax on about $2.6 trillion in earnings that U.S. companies have parked overseas. The plan would end the taxation of corporations’ offshore income by moving to a territorial system, in which most foreign profits would be exempt from U.S. taxes. Currently, the U.S. taxes business income no matter where it’s earned.

The White House made its opening bid for what officials called the “biggest tax cut” in U.S. history — with cuts that would benefit businesses, the middle class and certain high-earning individuals — but left unanswered questions about whether the plan would be paid for, or how.

A list of goals for the tax overhaul, unveiled by President Donald Trump’s top economic adviser Gary Cohn and Treasury Secretary Steven Mnuchin Wednesday, calls for slashing the federal income tax rate to 15% for corporations, small businesses and partnerships of all sizes. It also imposes a one-time tax on about $2.6 trillion in earnings that U.S. companies have parked overseas. The plan would end the taxation of corporations’ offshore income by moving to a territorial system, in which most foreign profits would be exempt from U.S. taxes. Currently, the U.S. taxes business income no matter where it’s earned.

On the individual side, it proposes condensing the existing seven income tax rates to just three, cutting the individual top rate to 35% from 39.6%. It would also end a 3.8% net investment income tax that applies only to individuals who earn more than $200,000 a year, repeal the alternative minimum tax and eliminate the estate tax, which currently applies only to estates worth more than $5.49 million for individuals and $10.98 million for couples.

At the same time, the plan would eliminate the federal income tax deduction allowed for state and local taxes -- a provision that would hit high earners in high tax states, including New York and New Jersey. The only itemized deductions that would be preserved under the plan would be for home mortgage interest and charitable contributions.

“We are determined to move as fast as we can and get this done this year,” Mnuchin said.

The White House proposal mirrors parts of the tax plan Trump proposed during the campaign, which would cost the government $6.2 trillion in the first decade, and more than $20 trillion by 2036 after accounting for interest costs and macroeconomic factors, according to an analysis by the nonpartisan Tax Policy Center.

REVENUE OFFSETSThe move to tax partnerships, limited liability companies and other so-called “pass-throughs” at 15% would represent a major tax cut for many businesses -- from mom-and-pop grocers to hedge funds — including Trump’s own business empire. Under current law, those companies pass their earnings and deductions through to their owners, who then are taxed at their individual income tax rates.

Shortly after the election, Mnuchin said Trump’s tax plan would provide “no absolute tax cut for the upper class.”

It wasn’t immediately clear Wednesday whether the plan would pay for itself; Mnuchin and others have said it would stimulate enough economic growth to cover the cost of the tax cuts. Economists have called that proposition into question — raising questions about whether any tax cuts it proposes would have to be temporary under congressional rules.

“This is going to be the biggest tax cut and the largest tax reform in the history of our country and we are committed to seeing this through," Mnuchin said at an event in Washington on Wednesday morning.

The plan’s scant detail made it difficult to immediately assess its economic impact. Kyle Pomerleau, director of federal projects at the Tax Foundation said in a Twitter message: “Sorry, friends. We cannot model this. Definitely not enough detail.”

DEMOCRATIC OPPOSITIONTrump’s goal of enacting a large tax cut faces daunting obstacles in Congress, including surefire Democratic opposition. The Republican Party is divided on how and whether the plan should be paid for. And a Senate rule prevents any tax plan from adding to the federal deficit outside a 10-year window — if it’s enacted with a simple majority rather than 60 votes, a procedure known as budget reconciliation.

Mnuchin said lawmakers in the House and Senate agree with the White House on core business rates, creating a middle-income tax cut and stimulating the economy.

“We want to look at every avenue, but we think reconciliation is the preferred process, we think that’s the most logical process to bring tax reform through,” Ryan said to reporters Wednesday. Senate Majority Leader Mitch McConnell said Tuesday he doesn’t expect to have Democratic involvement on the tax plan.

Senator Chuck Schumer, the Democratic leader, promised opposition to a tax plan that gives breaks to the highest earners.

“If the president’s plan is to give a massive tax break to the very wealthy in this country — a plan that will mostly benefit people and businesses like President Trump’s — hat won’t pass muster with we Democrats,” he said Wednesday morning on the Senate floor. “We don’t need a tax plan that allows the very rich to use pass-throughs to reduce their rates to 15% while average Americans are paying much more.”

‘TOO EARLY’The White House proposal didn’t specify whether a tax plan should be revenue-neutral — if it isn’t, the cuts would expire within a decade. It didn’t take a position on revenue-raisers that House Republican leaders have proposed, including a border-adjusted tax on imports and domestic sales.

The White House proposal mirrors parts of the tax plan Trump proposed during the campaign, which would cost the government $6.2 trillion in the first decade, and more than $20 trillion by 2036 after accounting for interest costs and macroeconomic factors, according to an analysis by the nonpartisan Tax Policy Center.

Cohn and Mnuchin briefed Ryan and McConnell, along with House Ways and Means Chairman Kevin Brady and Senate Finance Chairman Orrin Hatch on Tuesday afternoon. As Hatch left, he tempered expectations of the White House and Congress coming to agreement on key tax questions in the foreseeable future.

“It’s too early,” Hatch told reporters. “We’re just getting into it.”

MARKET RESPONSEThe S&P 500 climbed above its closing record as Mnuchin outlined a lower corporate tax rate and a break on bringing overseas profit to the U.S. The index gave up half of those gains as officials left unanswered questions about how the proposal would affect the deficit. All major equities markets closed lower, erasing gains to end near session lows. The dollar pared its gain by half and Treasuries extended gains in the immediate aftermath of the presentation.

Policy speculation whipsawed assets throughout the day as the White House scrambles to improve its record in the first 100 days of Trump’s presidency. Equities tumbled from session highs after Politico reported the administration may end Nafta and the Federal Communications Commission chairman proposed rolling back net-neutrality rules. At the same time, Freedom Caucus members endorsed a plan to repeal Obamacare.

Investors remained fixated on the prospect for tax reform that ostensibly would boost economic growth and corporate profits. Focus may turn to reaction from Congressional Republicans. The report that Nafta remains in White House crosshairs rekindled angst that protectionist trade policies could harm global growth.

"The plan that has been announced today is very aggressive, and unlikely to pass as is,” said Alan Gayle, a senior strategist who helps oversee $42 billion in assets at RidgeWorth Investments in Atlanta. “I haven’t heard of anyone on the street that has been adjusting earnings estimates based on the likelihood we’ll get tax reform. This remains an unknown and it’s not being factored into the market yet.”